Abstract:
This paper examines the reasons for underinsurance of the poor in Sri
Lanka. Analyze is based on the data gathered in Kurunegala and Puttalam Districts to
find out the factors have so far hindered the development of a market for micro
insurance. This study is based on data collected through 80 questionnaires, 20 in-depth
interviews with low income people and expert interviews.
The test hypotheses for micro insurance is impeded by (1) Transaction
costs,(2) Adverse selection, moral hazard and fraud,(3) 111 suited products offered,(4)
Lack of scalability ,(5) Lack of risk aversion, information, understanding and rationality.
The first four hypothesis find that insurers can already have reduced transaction costs,
adverse selection, moral hazard and fraud to levels which micro insurance feasible and
further find that the products currently offered by Sri Lankan insurers are
commensurately scalable (with the exemption of health insurance) and offer significant
risk reduction potential to low income clients, indicating that the products offered are
not ill suited to the clients' needs, therefore can be rejected. However the results proves
that although they averse the risk, the target market of micro insurance products is
unaware of availability of micro insurance products, lack of financial literacy and
understanding the basic insurance concepts and irrational behavior impeding the
demand for micro insurance. The result of Hypothesis 5 reveals that micro insurance is
impeded by lack of risk aversion, information, understanding and rationality. The
preliminary results suggest that effective demand staying far behind potential demand is
deemed the most important reason for underinsurance in Sri Lanka.
